Nov 24 2009
Computer Robotic Trading
An interesting story came out yesterday on AOL’s new Daily Finance website which dealt with ‘High Speed’ trading in the stock market. The parallels to what is called ‘computer robotic wagering’ in pari-mutuel wagering were easy to see, and some on Wall Street use the same arguments that those in the racing business use to condemn the practice.
“There’s also the concern that high speed trading gives an unfair advantage to high-rollers and major institutional clients who can afford the expensive, high-tech setups needed to participate.”
Much like the current CRW players have on the pari-mutuel side, high speed traders are also concerned about how the industry reacts to their business model and what future rules and regulations they might face moving forward.
“Traders are uncertain about what type of new regulations may come from the U.S. Securities Exchange Commission or Congress. The biggest fear is that regulators could potentially move to ban high frequency trading altogether. Less dramatic, there could be restrictions on trading volumes or new taxes being levied on the industry to rein in profits.”
Many believe in the old addage from Lawrence Garfield in Other People’s Money however. “You can change all the laws you want. You can’t stop the game. I’ll still be here. I adapt.”
“Faced with new regulations, Gray Long, chief information officer for Trading Cross Connects, said that technology and innovation would immediately be implemented to find “work-arounds.” He suggested that as soon as any new regulation is enacted, new algorithms could be created to adapt and find trading strategies that would be able to help firms profit in the new environment.”
The most interesting parallel however is the realization that it’s not just about the numbers and arbitrage. As with any good CRW system in pari-mutuel wagering, high speed trading requires long term strategy.
“But in most cases, a long-term business strategy will win the day, he (Allen Zaydlin, CEO of electronic trading software firm InfoReach) said, because no matter how many thousands you spend creating the infrastructure needed to compete with speed, ultimately, “somebody comes with newer, more modern and optimized equipment, and you have to rethink your strategy.”
Give more people the same tools and the ‘edge’ goes away. As more and more people try to get into the arena, the more important part of the equation will be the ability to optimize the underlying logic making it run. In pari-mutuel wagering, it means that to optimize the ROI, the person using CRW has to become a better predictor of the outcome of the race. They must become a better handicapper.
The big question on the pari-mutuel side has always been “Is it fair?”
My response has always been yes.
Pari-mutuel wagering has always been one person wagering against everyone else in the pool. Anyone who plays with any frequency always tries to have some kind of edge over the rest of the players. You can’t beat the takeout without it. Some people can read past performances better. Some people use ‘The Sheets’. Some people know the trainer. Some get up in the morning and time their own workouts. Some people spend hours watching race replays. And yes, some people use computer software to help them wager. There is even simple software available to anyone, like DRF’s Formulator, and the conditional wagering systems available on a few of the ADW platforms (TwinSpires and Premier Turf Club for example).
There are many tools out there to enhance performance at the window for those that care to put in the time, effort, and capital to use them. Unfortunately, most people don’t want to do it, and therefore believe that it’s not fair to them that there are people out there that do.
I would argue that is unfair.